Boston Scientific - Q2 2023

Transcript

Operator (participant)

Good day, welcome to the Boston Scientific Q2 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Lauren Tengler, Vice President in Investor Relations. Please go ahead.

Lauren Tengler (VP of Investor Relations)

Thank you, Kyle. Welcome everyone, thanks for joining us today. With me on today's call are Mike Mahoney, Chairman and Chief Executive Officer, and Dan Brennan, Executive Vice President and Chief Financial Officer. We issued a press release earlier this morning announcing our Q2 2023 results, which included reconciliations of the non-GAAP measures used in the release. We have posted a copy of that release, as well as reconciliations on the non-GAAP measures used in today's call, to the investor relations section of our website under the heading Financials and Filings. The duration of this morning's call will be approximately one hour. Mike and Dan will provide comments on Q2 performance, as well as the outlook for our business, including Q3 and full year 2023 guidance, then we'll take your questions. During today's Q&A session, Mike and Dan will be joined by our Chief Medical Officer, Dr. Ken Stein.

Before we begin, I'd like to remind everyone that on the call, operational revenue growth excludes the impact of foreign currency fluctuations, and organic revenue growth further excludes acquisitions and divestitures, for which there are less than a full period of comparable net sales. Relevant acquisitions and divestitures excluded for organic growth are Baylis Medical, which closed on February 14th, 2022, the majority stake investment in Acotec Scientific Holdings Limited and Apollo Endosurgery, which closed in February and April of this year, respectively. Divestitures include the endoscopy pathology business, which closed in April of this year. Please note that we have elected to consolidate Acotec results on a one-quarter lag, which had an immaterial impact on our Q2 reported and adjusted results. On June 15th, 2022, we announced our entry into a definitive agreement to purchase a majority stake in M.I.TECH.

The agreement required global regulatory approvals that we were unable to obtain in some countries. As a result, the original agreement was terminated. In June of this year, we purchased a minority stake in M.I.TECH. For more information, please refer to our financial and operating highlight stack, which may be found on our investor relations website. On this call, all references to sales and revenue, unless otherwise specified, are organic. This call contains forward-looking statements within the meaning of federal securities laws, which might be identified by words like anticipate, expect, may, believe, estimate, and other similar words.

They include, among other things, statements about our growth and market share, new and anticipated product approvals and launches, acquisitions, clinical trials, cost savings and growth opportunities, our cash flow and expected use, our financial performance, including sales, margins, and earnings, as well as our tax rates, R&D spend, and other expenses. If our underlying assumptions turn out to be incorrect or if certain risks or uncertainties materialize, actual results could vary materially from the expectations and projections used or expressed or implied by our forward-looking statements. Factors that may cause such differences include those described in the Risk Factors section of our most recent 10-K and subsequent 10-Qs filed with the SEC. These statements speak only as of today's date, and we disclaim any intention or obligation to update them. At this point, I'll turn it over to Mike. Mike?

Mike Mahoney (Chairman and CEO)

Thanks, Lauren, and thank you to everyone for joining us today. We're very proud of our second quarter results, which exceeded our expectations and demonstrated the strength of our category leadership strategy, commitment to clinical evidence, and the winning spirit of our global team. In second quarter 2023, total company sales grew 12%, both operationally and organically, versus second quarter 2022, exceeding the high end of our organic guidance range of 7%-9%. We anticipate that most of our businesses units grew in line or faster than their respective markets, fueled by our innovative portfolio and commercial execution, also supported by healthy procedure demand. Second quarter adjusted EPS of $0.53 grew 21% versus second quarter 2022, exceeding the high end of the guidance range of $0.48-$0.50. In second quarter, adjusted operating margin was 26.8%, also slightly higher than anticipated.

Through the first half of the year, we have grown their business organic sales rate at 13%, with broad-based durable growth across all of our business units and regions. Importantly, we have also grown our adjusted EPS growth 20% during the first half, while balancing our investments to ensure we achieve our short-term and long-term goals. For our 2023 guidance, we're guiding this third quarter 2023 organic revenue growth of 7%-9%, and we expect momentum to continue and are raising our full year organic guidance to 10%-11%. Our third quarter adjusted EPS estimate is $0.46-$0.48, and we're increasing our full year adjusted EPS range to $1.96-$2.00.

I'll now provide some additional highlights in the second quarter, along with comments on our 2023 outlook, and Dan Brennan will provide more details on the financials. Regionally, and on an operational basis, the U.S. grew 9% in second quarter, with notable strength in our WATCHMAN, PI, and endoscopy businesses. Europe, Middle East, Africa also grew 9% on an operational basis versus second quarter, with strong performance in the region was broad-based, with double-digit growth in four out of our five major markets in Europe. Across the portfolio, we saw strength in new and ongoing product launches, including FARAPULSE, POLARx, ACURATE neo2, and LUX-Dx. Asia Pacific grew 24% operationally versus second quarter, led by strength in China and Japan.

Japan growth is fueled by new products, including Agent, our drug-coated balloon for the coronary arteries, and Rezum, our minimally invasive BPH technology, with device performance and procedures that leave nothing behind, is resonating in the market. China delivered excellent growth in the second quarter, led by our innovative portfolio and commercial execution against the COVID impact second quarter 2022. We also saw particular strength in our interventional cardiology therapies, WATCHMAN, CRM, and PI business units. We continue to expect double-digit growth in China for the full year. I'll now provide some additional commentary on our businesses, starting with urology. Urology sales grew 8% organically in the second quarter. The stone management franchise grew double digits, driven by LithoVue and ongoing globalization efforts. Rezum continues to do well globally, growing strong double digits in the quarter and most recently launching in Brazil.

We continue to see ongoing momentum within our prosthetic urology franchise, fueled by patient activation efforts designed to bring awareness to our erectile restoration and male incontinence interventions. Endoscopy sales were excellent, growing 12% organically and 14% operationally in the second quarter, with notable strength in the U.S., Latin America, and Asia Pac, with new product momentum and healthy procedure demand. Our Apollo integration is progressing well, and earlier this month, we received FDA clearance for OverStitch NXT, a suturing system that enables suture placement during advanced endoscopic procedures. This next-generation device brings ease-of-use benefits and improved accessibility when using a single-channel endoscope. Neuromodulation sales grew 3% organically in the second quarter.

Spinal cord stimulation sales were flat versus prior year, and we expect SCS sales growth to improve in the second half of the year, with strong trialing in the second quarter in support of clinical evidence, which was presented this month at ASPN. Notably, six-month outcome data were reported from the SOLACE trial, which is a randomized controlled trial for nonsurgical back pain, which demonstrated superior outcomes for SCS against conventional medical management, also consistent with primary endpoint results. Our brain franchise grew double digits in the quarter, with continued momentum from new product launches in the U.S. and procedure recovery in Europe. Earlier this month, we received FDA approval for the PRECISE Neural Navigator 5 software, which, when used with our deep brain stimulation system, can help provide clinicians with data for efficient programming in the treatment of Parkinson's disease.

Peripheral intervention sales were very strong, growing 13% organically versus second quarter 2022. Our arterial franchise grew double digits, led by our drug-eluting portfolio. Earlier this month, after reviewing all available data and analysis, the FDA provided updated information associated with paclitaxel-coated devices used to treat PAD, recognizing the safety of these devices and eliminating the requirement for specific warning language within device-related labeling. We're pleased that the FDA determined that the available data do not support an excess mortality risk. We remain dedicated to helping physicians provide the best care possible for their patients. In venous, U.S. growth was led by ongoing strength in Varithena, a non-thermal treatment for varicose veins, with international growth driven by our clot management technologies. Our interventional oncology franchise grew double digits with strength across the entire portfolio.

Last month, we received clearance for the EMBOLD soft and packing coils, which, along with the EMBOLD fiber coil, complete our detachable coil system. We also began our limited market release for Obsidio, which is the only conformable gel embolic material that's indicated for the peripheral vasculature, adding to our robust embolization portfolio. Cardiology delivered another excellent quarter with organic sales growth of 13% versus second quarter. Within cardiology, the interventional cardiology therapies business, sales grew 12% organically versus second quarter. Our coronary therapies franchise growth is driven by our innovative imaging technologies, as well as the recent launch of our Agent drug-coated balloon in Japan, offsetting ongoing price pressure in drug-eluting stents. Our structural heart valves franchise grew strong double digits with another quarter of performance from our ACURATE neo2 in Europe.

Market reception remains very high, backed by clinical evidence, ease-of-use benefits, and a focus on lifetime patient management. We continue to expect to bring ACURATE neo2 to the U.S. in the second half of 2024. WATCHMAN sales grew 27% organically versus second quarter, also outpacing the market. U.S. demand remains strong. International growth was led by China and Japan. We were pleased to have completed an enrollment in the WATCHMAN FLX Pro CT pilot study, which is a single study design using multiple imaging modalities to assess post-procedural healing in the next generation of WATCHMAN FLX Pro. We expect continued momentum within the WATCHMAN franchise, further supported by the anticipated approval of our both WATCHMAN FLX Pro and our steerable sheath, called TruSTEER, by the end of 2023. Cardiac rhythm management sales grew 5% organically in the quarter.

In core CRM, our high voltage business grew low single digits, our low voltage business grew mid-single digits, we believe that performance was in line or slightly below market growth as the replacement tailwinds neutralize. Our diagnostic franchise grew double digits in the quarter on the strength of our broad cardiac diagnostic portfolio, we anticipate momentum will continue, supported by the approval of our next generation ICM, called LUX-Dx II, expected later this year. Electrophysiology sales grew 28% organically in the second quarter. International growth continues to be fueled by strong performance in both FARAPULSE and POLARx across Europe and APAC. We continue to make progress toward bringing these innovative technologies to the U.S., we expect POLARx approval in the third quarter. In addition, we are looking forward to the data presentation of the ADVENT trial, our U.S. IDE, at the ESC conference on August 27th.

The ADVENT trial is a first of its kind randomized clinical trial designed for a non-inferior 12-month primary safety and efficacy endpoints, compared to commercially available RF and cryoablation systems. It is notable for its design and rigor, as it seeks to demonstrate the single procedure effectiveness of an intervention without the use of antiarrhythmic drugs and reablations. We continue to anticipate the approval of FARAPULSE in the U.S. in 2024. The access solutions franchise grew strong double digits in the second quarter, with continued momentum in the U.S. and Japan, with a differentiated VersaCross transseptal platform. We're also proud of the performance of our global teams and are confident in our future. We remain committed to sustainable innovation and our financial goals, consistently growing sales faster than our underlying markets, expanding operating margins, and delivering strong double-digit adjusted EPS growth with strong adjusted free cash flow generation.

We're looking forward to our September 20th Investor Day, where our leadership team will provide more insight into our innovative pipeline today, the opportunities ahead, and our long-term financial goals. Before I pass along to Dan, I want to announce that we also have some movement within our business unit leadership team. After nearly 20 years at Boston Scientific, Maulik Nanavaty has announced his plan to retire in August. Jim Cassidy will now lead the Neuromodulation business, where he previously spent eight years prior, before moving over to lead the WATCHMAN franchise five years ago. Lastly, Angelo De Rosa will now lead our WATCHMAN business. Angelo has spent the last 10 years with Boston Scientific in Europe, most recently leading the European CRM and EP business.

Congratulations to Jim and Angelo, and we appreciate Maulik for his many contributions to neuromodulation in Boston Scientific throughout his career. With that, I'll pass it over to Dan to provide more details on the financials.

Dan Brennan (EVP and CFO)

Thanks, Mike. Second quarter 2023 consolidated revenue of $3.599 billion represents 11% reported revenue growth versus the second quarter of 2022, reflects a 100 basis point headwind from foreign exchange, in line with expectations. Excluding this $33 million headwind from foreign exchange, operational revenue growth was 12% in the quarter. Sales from acquisitions and divestitures contributed 30 basis points, resulting in 11.6% organic revenue growth, exceeding our guidance range of 7%-9%. Q2 2023 adjusted earnings per share of $0.53 grew 20.7% versus 2022, exceeding the high end of our guidance range of $0.48-$0.50, driven by strong sales performance and a favorable effective tax rate in the quarter.

Adjusted gross margin for the second quarter was 72%, slightly ahead of our expectations, resulting in an adjusted gross margin of 71.2% for the first half of 2023. We continue to expect second half gross margin to be lower than the first half of 2023, and in line with the second half of 2022, largely due to timing of foreign exchange movements in 2022. Second quarter adjusted operating margin was 26.8%, slightly ahead of expectations, predominantly driven by strong top-line performance and partially offset by slightly higher SG&A spend. We continue to focus on adjusted operating margin expansion and are maintaining our full year 2023 goal of approximately 26.4% adjusted operating margin, which would represent 80 basis points of improvement versus the full year 2022. On a GAAP basis, the second quarter operating margin was 14.3%.

Moving to below the line, second quarter adjusted interest and other expenses totaled $93 million, slightly higher than expectations, driven by FX volatility in certain unhedged currencies. On an adjusted basis, our tax rate for the second quarter was 9.8%, slightly below expectations due to certain discrete tax items and a lower than anticipated operational tax rate of 13.2%, driven by our geographic mix of earnings in the quarter. Fully diluted, weighted average shares outstanding ended at 1,456 million shares in Q2, which includes the issuance of 23.98 million common shares upon the conversion of our mandatory convertible preferred stock on June first of this year.

Free cash flow for the quarter was $514 million, with $658 million from operating activities, less $143 million net capital expenditures. Excluding special items, adjusted free cash flow was $730 million. We continue to target full year 2023 adjusted free cash flow in excess of $2.3 billion. As of June 30, 2023, we had cash on hand of $426 million, and our leverage was 2.4 times in line with our expectations. I'll now walk through guidance for Q3 and the full year. We expect full year 2023 operational revenue growth to be in a range of 11%-12%, which excludes an approximate 50 basis point headwind from foreign exchange.

Excluding the impact of closed acquisitions and divestitures, we expect full year 2023 organic revenue growth to be in a range of 10%-11% versus 2022. We expect third quarter 2023 operational revenue growth to be in a range of 8%-10% versus Q3 2022, excluding an approximate 50 basis point tailwind from foreign exchange based on current rates. Excluding the contribution from closed acquisitions and divestitures, we expect third quarter 2023 organic revenue growth to be in a range of 7%-9%. We continue to expect our full year 2023 adjusted below-the-line expenses to be approximately $340 million. We continue to expect our full year 2023 operational tax rate to be approximately 14% under current legislation and forecasted geographic mix of sales.

We now expect an adjusted tax rate of approximately 12.5%, reflecting favorable tax discretes recognized in the second quarter. We expect a fully diluted weighted average share count of approximately 1.475 billion shares for Q3 2023, and 1.464 billion shares for full year 2023. We expect full year adjusted earnings per share to be in a range of $1.96-$2.00, representing 15%-17% growth versus 2022, which we believe delivers top-tier financial performance. We continue to anticipate a neutral impact from FX on our full year 2023 adjusted earnings per share, and we expect third quarter adjusted earnings per share to be in a range of $0.46-$0.48.

For more information, please check our investor relations website for Q2 2023 financial and operational highlights, which outlines more details on Q2 results and 2023 guidance. In closing, I'm very proud of our first half financial performance, with top-tier organic revenue growth of 13%, adjusted operating margin of 26.2%, and adjusted earnings per share growth of 20%, all contributing towards our top-tier financial goals. I look forward to continued momentum in the second half of 2023, and with that, I'll turn it back to Lauren, who will moderate the Q&A.

Lauren Tengler (VP of Investor Relations)

Thanks, Dan. Kyle, let's open it up for questions in the next 35 minutes or so. In order for us to take as many questions as possible, please limit yourselves to one question. Kyle, please go ahead.

Operator (participant)

Thank you, Lauren. We'll now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. The first question comes from Robbie Marcus with JPMorgan. Please go ahead.

Robbie Marcus (Senior Analyst)

Oh, good morning, and congrats on a really nice quarter.

Dan Brennan (EVP and CFO)

Thanks, Robbie.

Robbie Marcus (Senior Analyst)

Maybe with my one question, looks like you guys beat pretty much across the board, with the exception of neuromodulation. Looks like it was really strong geographically as well, split across the regions. You know, we've heard from some public statements from managed care companies that outpatients saw, you know, kind of a bolus in utilization, but it looks like it was global as well. I'd love to get a, you know, the read from you on what you're seeing, what's underlying demand, what is maybe one-time upside, and what you're seeing in the different regions around the world, and if there's any difference in patient, outpatient, cardio versus non-cardio. Thanks a lot.

Dan Brennan (EVP and CFO)

Sure. Good morning, Robbie. Yeah, as you know, our portfolio is with the interventional procedures that we offer, are very geared toward an outpatient setting, in which we think is very positive trend and strategy for the long-term outlook for Boston Scientific. It's where the market's moving towards. You know, just a quick snapshot around the world. Japan had a very strong quarter. You know, really, that's primarily portfolio-related. China had an excellent quarter. There was an easier comp in second quarter last year due to COVID impact. You know, I think that whole outpatient dynamic doesn't really play as significantly as much in Asia-Pac there. Really, it's more portfolio-related for Japan, some COVID benefit, but great performance in China.

I think what's impressive about Europe, it's like really across the board, across all the regions and the emerging markets. Some slowness in Russia, but we're lightly exposed in Russia, less than 1%. U.S. grew 9% as well. You know, you've seen a bit higher proportion of outpatient procedures in the U.S. than you do some of the other regions. We continue to see just very strong patient demand. You know, there's still a typically a very common wait list for most of our procedures for physicians, so it's a very steady supply, and we have a terrific portfolio to meet the market.

Robbie Marcus (Senior Analyst)

Thanks a lot.

Dan Brennan (EVP and CFO)

Thank you.

Operator (participant)

Our next question comes from Joanne Wuensch with Citi. Please go ahead.

Joanne Wuensch (Managing Director)

Good morning, thank you for asking, or for taking the question, letting me ask it. As soon as you print this very good quarter, I'm going to get 15 questions about, or more, about what to expect for ESC and for the analyst meeting. Maybe you can sort of set or level set what you expect or how we should think about putting those two events within the right framework.

Dan Brennan (EVP and CFO)

Sure. I'll have maybe Dr. Stein comment, and I'll see if I need to comment further afterwards.

Ken Stein (Chief Medical Officer)

Yeah. Thanks, Mike. Thanks, Joanne. you know, obviously, our big highlight at ESC is going to be the release of the data from ADVENT, which, you know, is, I guess everyone is aware at this point, our IDE trial to seek approval of FARAPULSE in the United States. We're really proud of the rigor of that trial. It is the first randomized trial in this space, comparing pulsed-field ablation with FARAPULSE system against thermal ablation with RF and cryo. It's an incredibly rigorous design in terms of the endpoints and the monitoring. we look forward to sharing those results in public.

Dan Brennan (EVP and CFO)

Yeah. I'll just make additional comment on FARAPULSE in the quarter. Really pleased to see the increased utilization in Europe. We still have been supply chain constrained with our councils in Europe, so the demand for the platform far exceeds our ability to supply thus far, which we've reported out for a number of quarters in a row. What's exciting, we just recently received a GMED approval for a manufacturing approval to actually manufacture this in Minnesota, where we are here. We do anticipate, with the capabilities of the European team and the materials work by the supply chain, that we expect a significant increase in availability of new accounts in the fourth quarter of 2023, and that continuing on in 2024, well in advance of the launch in the U.S.

Really proud of the supply chain team in this environment to build this capability internally, to meet the demand, and you should expect a number of new centers opening in the fourth quarter. The utilization is what surprised me.

The utilization growth within the served centers in Europe continues to be impressive, which speaks to the performance of the platform. Specific to Investor Day, Joanne, which is coming up here on September 20th for us, I would expect to see what you've seen in past Investor Days. You'll see the team give a sense of what we think we can do with our financial goals over the next three years. It's a formula that's worked pretty well for us in our past Investor Days, and I would look for us to do the same, here in September.

Joanne Wuensch (Managing Director)

Thank you very much.

Operator (participant)

Our next question comes from Rick Wise with Stifel. Please go ahead.

Rick Wise (Analyst)

Good morning Mike. Hi, Dan. Maybe focusing on the excellent margin performance. Operating margins were particularly stand out and the divisional performance, I mean, MedSurg up 410 basis points, cardiovascular up 240 basis points. Help us understand, maybe in a little more detail, the drivers. Is it volume? Is it mix? To what extent did price play a role? Not quite sure I'm understanding your commentary, Dan, about the second half margins as well. Thanks so much.

Dan Brennan (EVP and CFO)

Sure. Let me try and put a finer point on that, Rick. For the first half, we ended at 26.2% operating margin with a real strong 26.8% in the second quarter, which puts us in a good spot for our full year target, which is the 26.4%. Specific to Q2 and the 26.8%, you know, for us, it's always about achieving the overall operating margin goals. I think history would show that we manage all lines of the P&L pretty well to accomplish that objective.

you know, in any given period, you may see one area of the P&L might contribute more or less, but the ultimate goal is obviously to get to that bottom line. really specific to Q2, you know, I'm really happy that we got to that 26.8% adjusted operating margin. It's 160 basis points better than last year. we were also able to accelerate some key SG&A investments to ensure the success of some of those upcoming transformational launches that we have, you know, starting here, hopefully, this year with our cryo launch. for us, it's always about, you know, all areas of the P&L can contribute to the overall operating margin story.

Relative to first half, second half, the gross margin, which was a little north of 71% for the first half, should be lower in the second half, should be more in line with where we were in the second half of last year, kind of in that 70.5 range for the second half. The operating margin for the second half, will get us, will be higher than it was in the first half, and obviously get us to that 26.4% goal for the year. The reason for the gross margin being lower in the second half, as we've said, is the FX movements in 2022.

As you go forward, think lower gross margin in the second half, but higher operating margin in the second half to get to that 26.4%. One little slight quarterly nuance is I would expect to see a step down in Q3 relative to that 26.8% that we posted in Q2, and then a step up in Q4 to get to the overall number, to get the 26.4% for the year. Hopefully that gives you a little bit of flavor of how we were thinking about it in Q2 and what the second half would bring to get us to that 26.4% for the year.

Rick Wise (Analyst)

Appreciate that, Dan. Thanks.

Dan Brennan (EVP and CFO)

Sure.

Operator (participant)

Next question comes from Larry Biegelsen with Wells Fargo. Please go ahead.

Larry Biegelsen (Managing Director)

Good morning. Thanks for taking the question. I'll reiterate my congratulations on another strong quarter here. Dr. Stein, on ADVENT, just using the same definition of success in ADVENT as Manifest, I think the success rate was 74%. What differences do we need to consider between the two studies? How much do you think those differences could impact the results for FARAPULSE? Separately, what have the success rates been with RF and cryo in previous studies, you know, when using the same criteria as ADVENT? Sorry for the long question. Just lastly, if FARAPULSE is numerically lower on success or efficacy versus RF and cryo, how do you think it will impact adoption? Thanks for taking the question.

Ken Stein (Chief Medical Officer)

Yeah, sure, Larry. There's a lot there. Let me start, again, reinforce to everyone. The definition of, you know, quote, unquote, success is very different across a lot of the trials. ADVENT, I think, has the most rigorous definition of what constitutes success, frankly, compared to any trial that's ever been done in this space, whether it's TFA or whether it's thermal ablation. Specifically, ADVENT is a randomized trial. ADVENT requires patients to have success, to have no arrhythmia recurrence, cannot continue taking antiarrhythmic drugs, even at doses that had previously failed, and cannot be reablated during the so-called three-month blanking period after the index ablation.

It also includes a very rigorous screening for asymptomatic arrhythmias, including three days of periodic Holter monitoring throughout the course of the one-year follow-up in the study. I think because of that, there's really no way to make apples to apples comparisons across the trials. You know, and the other thing I'd do, you know, in terms of expectation, would refer everyone back to the design manuscript for the ADVENT study, which is now published online in Heart Rhythm.

And the study was designed around to achieve optimal power around an assumed success rate, using this definition of 65% in both the thermal and the FARAPULSE arms. And again, to remind everyone, the studies were powered for non-inferiority. For our standpoint, then, you know, success would constitute a demonstration of non-inferiority, both for safety and for efficacy.

Larry Biegelsen (Managing Director)

All right. Thank you so much.

Operator (participant)

Our next question comes from Travis Steed with Bank of America. Please go ahead.

Travis Steed (Managing Director of Equity Research)

Hi, congrats on a good quarter. Just maybe following up to Larry's question, how would you frame up the commercial opportunity for FARAPULSE for the market growth and share, kind of based on the various potential outcomes for ADVENT? I think you've said it's the most exciting product launch in your career, but just curious how you think the commercial opportunity frames out based on how ADVENT comes out. Then, Troy, have you seen the data yet, or are you still blinded to the data? Thanks.

Mike Mahoney (Chairman and CEO)

Yeah, we're obviously very bullish. You know, WATCHMAN's been a pretty amazing product launch as well. Sometimes it gets drowned out in some of these, with the continued momentum in that category and the growth of that market. FARAPULSE is very exciting for us. You know, we've been investing for quite a while post-acquisition to build up manufacturing capabilities, which is the most important thing we could do to meet the demand that we're seeing in Europe and in certain countries, in Asia Pac. We're very pleased with that milestone and as that comment, really expect to drive a number of new installs in the fourth quarter. I also mentioned just the ongoing increase in utilization.

The physicians who are using that in Europe and selected markets in Asia continue to drive more usage of it, which really is a terrific sign, very similar to what we saw with WATCHMAN throughout that progress. We also have a very strong clinical trial cadence with our persistent trial ADVANTAGE, which is enrolling very quickly and other trials that we've announced, as well as ongoing enhancements to the portfolio. We have the R&D to continue to strengthen the portfolio, the clinical science studies to continue to advance it. It's the fastest growing, one of the fastest growing fields along with WATCHMAN in MedTech, where we have a very low share.

We know it's a very competitive market, but we feel we have many advantages with FARAPULSE and are really driving the clinical data in this field. We also have the commercial infrastructure to exploit the opportunity. We're very bullish on it, and we're looking forward to the ADVENT release.

Operator (participant)

Our next question comes from Danielle Antalffy with UBS. Please go ahead.

Danielle Antalffy (Senior Equity Analyst)

Good morning, everyone. Thanks so much for taking the question, and congrats to Maulik. He was always a pleasure to work with. If you could pass along my best to him, I'd appreciate it.

Mike Mahoney (Chairman and CEO)

Thank you very much.

Danielle Antalffy (Senior Equity Analyst)

Thank you so much. My question is really around just thinking about the back half of the year top line growth guidance. It does organically move higher, and I just want to make sure I understand all the puts and takes there. Obviously, back half of the year does get a little bit tougher from a comp perspective on an organic basis, but does reflect some deceleration. Want to basically understand how much of this is just prudent conservatism on your part, which you guys tend to do, versus, you know, some real product-driven or business-driven things we need to consider when looking at the back half. Thanks so much.

Dan Brennan (EVP and CFO)

Sure, Danielle, I think I can take that one. If you look at the second half, take the full year of 10%-11%, which I'm super excited about. I mean, to have a fully double-digit range for the full year for organic revenue growth is exciting, and I'm proud of that. When you look at the second half, the guidance we've given for the third quarter is 7%-9%, so 8% at the midpoint. The implied is 7%-9% for the fourth quarter to get to that. Coupled with the first half performance, that's what gets you to that 10%-11% full year result. I think that's appropriate and prudent guidance with where we are.

The comps, they're a little harder in the second half. I think it's like 100 basis points harder in the second half than they are in the first half. Overall, I think that 7%-9% is appropriate, prudent for the second half, and if it gets us to that 10%-11% for the full year, I think that'd be a really successful year, coupled with 80 basis points of margin expansion and EPS growth of 15%-17% adjusted EPS for the year. I'd call that a pretty good year for the company.

Danielle Antalffy (Senior Equity Analyst)

Agreed. Thank you so much, Dan.

Dan Brennan (EVP and CFO)

Sure.

Operator (participant)

Our next question comes from Matt Taylor with Jefferies. Please go ahead.

Matt Taylor (Managing Director)

Hi, good morning, and thanks for taking the question. Dan, I had one more conceptually on margins, I guess. I wanted to understand some of the key puts and takes for margin expansion going forward. Specifically, I think a lot of investors are focused on inflation, you know, kind of abating and the potential for you to get savings on things like freight and lower component costs. Do you think that we could see any of that be good guys for margins in 2024 and beyond? Maybe just speak to the high level factors there, if you could.

Dan Brennan (EVP and CFO)

Sure. I'll start at the kind of the overall operating margin level. If you say that we achieved the 26.4% adjusted operating margin goal for this year, the good news is there's still a long runway of margin expansion journey for us well beyond that 26.4%. We've said publicly many times that we believe that, you know, 30%+ is a very reasonable target for the company. There's nothing structurally that prevents us from getting there. To the extent that you have a durably, consistently growing top line, it just gives you a number of leverage opportunities to continue to grow that. You have that kind of as a backdrop.

Specific to areas of the P&L, I think the inflation piece is largely, you know, hitting gross margin. We've said that, you know, we had the $375 million of impact in 2022 versus 2019 in gross margin, that in this year, it's basically stayed relatively consistent. It's not a headwind or a tailwind versus last year, but obviously a headwind versus that 72.4% margin that we were in in 2019. Specific to your question around what happens going forward, I don't think we'll see a lot of inflationary abatement in 2023. I think the guidance that we've given assumes we're kind of we are where we are for the year.

As we look forward to 2024 and beyond, I mean, this year, the full year gross margin is will be kind of approaching 71% for the year. That's a gap to where we used to be. Our goal, we're maniacally focused on getting back to that level. We do need some macro help in that, as you mentioned. You know, some of the elements of it, you know, freight, we do see that getting a little better. The inflationary impact of the cost of the inputs into our manufacturing process, we see that abating over time. The consistency of the supply of the materials into our manufacturing process has improved. I mean, frankly, that's improved, but it's not back to where it used to be.

It is choppier than we'd like to see it, and that does impact your ability to really run a really efficient manufacturing process. I think 2023, kind of, as I said, we are where we are. When you get to 2024 and beyond, I think there is an opportunity for gross margin to continue to contribute. Frankly, I think all areas of the P&L can contribute. Both areas in OpEx, SG&A and R&D, we can be more efficient. In R&D, we certainly can be more efficient overall in SG&A. If gross margin can move north of that, approaching 71% that we have for this year, I'm excited about the opportunity for margin expansion going forward.

Matt Taylor (Managing Director)

Great. Thanks. I'll leave it there. Thanks, Dan.

Dan Brennan (EVP and CFO)

Thanks, Matt.

Operator (participant)

Our next question comes from Matt O'Brien with Piper Sandler. Please go ahead.

Samantha Kurtz (MedTech Equity Research Analyst)

Hi, this is Samantha Kurtz on for Matt. Congrats on a great quarter and for taking our questions. I guess we would like to touch on the guidance again, maybe could you tell us a little bit about where you're most excited heading into the second half of the year and where we could potentially see that upside?

Dan Brennan (EVP and CFO)

Yeah, thank you. It's, I'm trying not to be vague. It's as you saw in the first half results, the results are really broad-based across Boston Scientific and across each region. Excellent growth in Asia-Pac, in Japan and China, continued share taking in Europe, and excellent, you know, performance in the U.S. It's really not one region driving it, which should give investors a lot of confidence in just the momentum and durable growth of Boston Scientific. You know, the standouts, there are a number of them. You continue to see WATCHMAN performance very strong. That market continues to grow well in excess of 20%. We continue to take a little bit of share in that category.

We're very excited in the future about the launches of the durable sheath and the next-gen WATCHMAN FLX Pro and the potential of these market expanding trials, which we'll read out in two years here. That platform continues to do very well. You know, our coronary business did excellent. We're seeing nice results of Agent in the U.S. We'll be launching that in 2024, which really reverses any declining trend in drug-eluting stents. That complex coronary business continues to do well. We saw great strong growth in PI and Endo, Europe. We had some softness in our Neuromod business. We anticipate that to get better in the second half. Really, it's a continued momentum. What we'll highlight in Investor Day is some of the questions we received today.

We've have some potential, very big growth drivers with ongoing WATCHMAN momentum, in our entire EP business with the launch of cryo, which we anticipate in the third quarter this year, and FARAPULSE, which has been discussed at great length. Just good momentum and extremely exciting launches coming that we'll detail out at Investor Day.

Samantha Kurtz (MedTech Equity Research Analyst)

Thanks so much.

Operator (participant)

Our next question comes from Matt Miksic with Barclays. Please go ahead.

Matt Miksic (Managing Director)

Hey, thanks so much for taking the questions, and congrats on a super strong quarter. Really impressive-

Dan Brennan (EVP and CFO)

Thank you.

Matt Miksic (Managing Director)

breaking into double digits. You're very welcome. Dan, I want to just follow up on cash flows and cash flow conversion and sort of what the puts and takes there been in the first half, what your expectations are in the back half, and your intermediate long-term goals there. I'm sure you'll know more about at the analyst meeting, but anything you can share now. Then also just on cash, if I could. You know, you have so many things going on in the portfolio and in your clinical programs. Love to get your sort of posture on the business development front and in your efforts to find and invest in additional technology and assets. Thanks.

Dan Brennan (EVP and CFO)

Sure. On free cash flow, I'm really happy with Q2. Strong free cash flow quarter, both sequentially and year-over-year. To your point, conversion, it's an area of focus for us, an area of opportunity that has our attention, and one we're looking to improve on as we go forward. There's, as I've said in the past, there's a couple of, you know, kind of key reasons, one of which is our GAAP operating income is lower than some of our peers. We're doing a pretty good job of closing that gap over time, and that'll be a key contributor. The acquisitive nature of what we do is can be a bit of a hamstring there.

I would look for, as you said, at Investor Day, I'd look for us to give some pretty concrete goals relative to what we think we can do over that LRP period of the next three years to improve the conversion ratio that we have. Again, it is a, it's a focus area for us and something that we will look to improve on going forward. I think your second question was on cash and M&A. Is that fair?

Matt Miksic (Managing Director)

Yeah. Yeah, yeah, exactly. Yeah.

Dan Brennan (EVP and CFO)

I mean, our capital allocation strategy has been remarkably consistent, right? It's, it's all about the number one priority being high quality tuck-in M&A. It's still our number one priority. We continue to look at opportunities in conjunction with our financial goals. We have closed two deals this year. The acquisition of Apollo closed in April, and then our acquisition of a stake in Acotec, the Chinese company, closed in February. We've closed a couple this year. Continue to look to be active in the M&A space, and that remains our number one capital allocation priority.

Matt Miksic (Managing Director)

Thanks, and congrats.

Dan Brennan (EVP and CFO)

Thanks, Matt.

Operator (participant)

Our next question comes from Marie Thibault with BTIG. Please go ahead.

Marie Thibault (Managing Director)

Hi, good morning. Nice quarter. Thanks for taking the question. Wanted to ask here on POLARx, the cryo catheter. You have that coming to the U.S. in second half of this year. I know it's had pretty great success in Europe. Given some of the supply dynamics happening with FARAPULSE, it sounds like manufacturing will ease there for FARAPULSE and the timing of the FARAPULSE launch here in the U.S. How are you thinking about that POLARx launch here in the U.S.? Can that same success be replicated here, do you think?

Dan Brennan (EVP and CFO)

Yes, thank you. POLARx is doing extremely well in Japan, doing quite well in Europe as well, where we also are selling FARAPULSE, as you indicated. We do not have the constraints on POLARx from a supply standpoint, the team has been well ahead of that. There's no limitations there. We do anticipate approval at some point, likely in the third quarter. We'll have the supply to meet the demand. We have the commercial team in place. You know, the cryo market is quite substantial in the U.S., and certainly doctors are very interested in FARAPULSE, there's a number of cryo users there. Some physicians may be looking for even longer term data on FARAPULSE.

we do see a nice market for cryo, you know, in the coming years, and that's an area that really hasn't seen any innovation in nearly a decade. we're excited about what POLARx delivers in terms of differentiating features. Physicians are anxious to try a new platform, and we have the demand to support it. we're blessed to have both FARAPULSE coming in the U.S. and cryo, as well as our mapping system, to really meet the demands of the electrophysiologist. we're excited about launching cryo.

Marie Thibault (Managing Director)

Okay, very good. Thanks so much.

Dan Brennan (EVP and CFO)

Yep. Thanks, Marie.

Operator (participant)

Our next question comes from Patrick Wood with Morgan Stanley. Please go ahead.

Patrick Wood (Managing Director)

Amazing. Thank you very much for taking the question. I'd love a little bit more detail, if you could, on the endo business. Obviously, did very well in the quarter. There's obviously a lot happening in that business overall, maybe just giving us a sense of patient volumes relative to share, pricing, like any details you can give around there, single-use endoscopy, that kind of thing. I'd love any more details if you could. Thanks!

Mike Mahoney (Chairman and CEO)

Thanks for the end of question. You know, just one of our very best businesses in the company, very global business, strong contributor to accretive OI margin and grew 12% in the quarter. You know, consistent with other quarters, on the portfolio, it's quite broad-based. We did see strong procedure volume in the quarter, which is positive. I would say the procedure volume overall is quite high in that arena, but still, as mentioned earlier, oftentimes wait lists, certainly in the U.S. and in Europe for that business. We expect ongoing strong demand there. You know, the Apollo acquisition, we're very excited about. You know, the strategy for with Endo is we have such a broad-based portfolio, with so many SKUs, that we are the clear category leader in that area.

We also, as you know, offer very differentiated technologies within that portfolio, like SpyGlass, AXIOS, and now Apollo, and also the EXALT Model D platform. Apollo also adds this, you know, endoluminal suturing capability, the opportunity to expand into the endobariatric market, which we believe will be a high-growth area. Certainly, it is in Asia today, in Japan and in the U.S., as patients seek a less invasive form to have that bariatric procedure. That it couples nicely with the entire portfolio. Our customers enjoy doing broad-based contracts with our Endo business and the portfolio that we offer, supported by strong procedure volume. We'll continue to innovate in that business and, you know, the scopes continue to contribute growth as well. It's really broad-based across that portfolio.

Patrick Wood (Managing Director)

Really appreciate it. Thanks for the details.

Mike Mahoney (Chairman and CEO)

Sure.

Operator (participant)

Our next question comes from Vijay Kumar with Evercore. Please go ahead.

Vijay Kumar (Senior Managing Director of Equity Research)

Hey, guys, thanks for taking my question. Maybe my first one here, you know, you look at 2023 2x organic, that's a pretty big number. Should we worry about comps? You know, when you look at the outlook here, can you just remind us the plus and minuses from a product perspective? What could be tailwinds, headwinds in fiscal 2024?

Mike Mahoney (Chairman and CEO)

Yeah. It's, it's good for us to create tough comps. You know, we didn't have an easy comp going into this year. It was about a 9% comp growing into 2023. That's a pretty healthy comp, and you indicated what the guidance is. I won't repeat up too many of the other comments. It's broad-based momentum. Growing in that guidance range versus 9% comp is a, is a strong year. We'll give guidance, obviously, you know, in January, for 2024, and Dan will give some insights to our three-year LRP at Investor Day.

We're really bullish about this next three-year period, based on these differentiated launches, that based on the current momentum that we have in the business, the product cycle that we have, and the opportunity to potentially take it up to another level over a three-year period with these launches, many of which we've been discussing the call today, many of them coming out of the cardio business. Also the benefits of the margin improvement opportunity that Dan outlined, which we think is a multiyear margin improvement opportunity for us, and the increasing strength of the balance sheet.

I think all those areas, you know, point to the momentum of the company, but we're excited about really the next chapter of the company, given the cadence of launches, that it really have been a bit more de-risked, I would say, versus, you know, a year ago.

Vijay Kumar (Senior Managing Director of Equity Research)

Understood. That's helpful commentary. Dan, on the margin question, any one-offs we, you know, that we should be aware of when we think of fiscal 2024? Anything on FX, China VBP, anything that's outside the normal, you know, operating levers at Boston and Delaware that we should be thinking about?

Dan Brennan (EVP and CFO)

Obviously with FX, we'll see where that is when we snap the line, when we give guidance. Hard to comment on that now. Then, there's always things that happen, you know, VBPs and other things that happen in every year. Our goal will be to hit that $26.4 for this year and continue to move that north over the LRP period. Again, as Mike said, look for us to be pretty prescriptive as what we think we can do at our Investor Day, upcoming in September.

Vijay Kumar (Senior Managing Director of Equity Research)

Understood. Thanks, guys. Congrats on the print.

Dan Brennan (EVP and CFO)

Thanks.

Operator (participant)

Our last question comes from Jayson Bedford with Raymond James. Please go ahead.

Jayson Bedford (Managing Director of Medical Technology)

Good morning, thanks for fitting me in. Just touching on an earlier question and trying to break out what's normalized market growth versus, say, a temporary catch-up here. You know, you've grown revenue in the double-digits in three of the last four quarters here. I guess my question is: What do you think end market growth is right now in the markets in which you compete?

Mike Mahoney (Chairman and CEO)

You know, you've seen others report, so the markets are healthy. You know, we had a bit tougher comps than some of the others in the second quarter, so we're proud of the growth we had in the second quarter. We had a maybe a bit less easier comp. You know, we'll further redefine what we think the markets are growing, you know, in the future. We call it maybe the, you know, we would have said 6%-7% range for our served market growth, and maybe that's a bit higher this year. We still believe that in most of our business units, we're growing faster than our peer group, which is what we're, you know, we're paid to do.

It's a healthy market, and whenever, you know, we have a very close pulse with our customers and the hospitals that have the big hospital systems who have already announced earnings. They have very healthy demand, but we see an ongoing, you know, patient backlog, for lack of a better, patient wait time. We don't see the current demand abating. Oftentimes you'll see a bit of a slowdown in some of the, you know, vacation months in August and so forth, which is very routine. We do anticipate continued support from strong procedure volume, you know, in the coming years. We don't see that really abating.

Jayson Bedford (Managing Director of Medical Technology)

Helpful. Thank you.

Lauren Tengler (VP of Investor Relations)

Thank you for joining us today. We appreciate your interest in Boston Scientific. If we were unable to get to your question or if you have any follow-ups, please don't hesitate to reach out to the investor relations team. Before you disconnect, Kyle will give you all of the pertinent details for the replay.

Operator (participant)

Thank you, Lauren. Please note, everyone, a recording will be available in one hour by dialing either 1-877-344-7529 or 1-412-317-0088, using replay code 4830236, until August third, 2023 at 11:59 P.M. ET. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.